The Melting Arctic and Changing Trade Routes
According to the Intergovernmental Panel on Climate Change (IPCC), global temperatures could increase by 2.5 to 10 degrees Fahrenheit over the coming century. With increasing average global temperatures, ice coverage in Arctic regions is decreasing and since 1979, September ice coverage in the Arctic has decreased by 25%. When ice coverage decreases, the size of the oceans expand, which gives way to potential new routes of travel. Within the Arctic we have seen the Northern Sea Route (NSR) open, creating alternative lanes for global trade. It creates an element of uncertainty for those along major trade routes that could catalyse a drastic shake-up of global trade.
Source: NASA Earth Observatory
This image illustrates the extent of Arctic Sea Ice in 2018, relative to previous levels
Source: Economist Intelligence Unit
Image depicts a comparison between the length of the NSR and Suez Canal Trade Routes.
The ability to use the Arctic would shorten and reroute many of the most internationally favoured trade routes, which primarily travel through the Suez and Panama Canals. Shorter routes are generally more economically viable with reduced fuelling and shipping costs. Even if the routes can only be used in the summer months, trade would be rerouted due to the reduced expenses. Egypt’s Suez Canal currently helps shorten trade between Europe and Asia, as it allows boats to cut through Africa instead of circumnavigating the continent. As it stands, using the Suez Canal shortens a trip between Japan and Rotterdam in the Netherlands to 30 days and 11,500 miles. However, using the NSR would cut this even further to 18 days and 6,900 miles. Whilst beneficial for businesses shipping from Asia to Europe, the use of the NSR means that ships traversing other routes would decline. Currently, trade through the Suez accounts for around 8% of global trade which would fall by two thirds with large scale use of the NSR. To illustrate, from 2008 to 2012, the average number of commercial ships was approximately 15,000—the re-routing would reduce that number by 10,000. Countries along this route depend on transit fees from the Suez Canal to supplement their economies. They’ll see employment levels drop as decreasing traffic means the surrounding infrastructure won’t need as much support.
As the Arctic melts and trade routes are reshaped, many countries with ports at the ends or along these routes will be impacted. The NSR follows the Northern edge of Russia’s border and whilst they have no official jurisdiction in those waters, their position still gives them a chance to develop exports out of the region. This is specifically important in the Gas and Oil sectors, which Russia are dependent on. Russian oil and gas production currently accounts for 38.9% of their economy. Liquefied Natural Gas (LNG) companies have seen the NSR as an opportunity to increase exports, due to the increasingly open waters surrounding the Yamal LNG plant in Northern Siberia. As the passage expands, savings from transit could quadruple for them by 2023. However, the NSR also gives Russia an opportunity to diversify its economy, away from oil and gas. The Kremlin has pledged $11 billion to develop the NSR over the next six years alone. This focuses on ports and support infrastructure. It will also open this route up to other countries and companies for use, potentially increasing Russian trade. One of these countries is China, which is expected to somewhat move away from the Suez Canal and use the NSR for 15% of all its trade. This is specifically important considering their Free Trade Agreement with Iceland. Their agreement, signed in 2013, was focused specifically on the potential the NSR has. With China’s strong trade links to the EU, Iceland could personally profit from the route by building a trans-shipment port. This could catalyse development in a similar way the Suez Canal has done for trans-shipment in Singapore. The Port of Singapore is currently the world’s busiest due to the influx of Europe-Asia trade via the Suez Canal. An Icelandic trans-shipment port could see similar boost due to its proximity to the NSR.
Whilst this is a positive development for countries along the NSR, Egypt benefitted directly from the Suez Canal. With potential reduced use by Russia and China, Egypt would need to find other ways to support its economy. Egypt currently earns $5Bn per year from the operation of the Suez Canal which runs through the country. As a source of income, Egypt uses transit fees to help control trade flowing through the route. However, with this potentially shorter route available, Egypt’s reliance on transit fees will become detrimental, since transit through the Suez Canal would only be economically viable for ships that need to make several stops along specifically the Suez route.
However, the impact of the NSR is only comprised of predictions that hold a massive element of uncertainty. A 2018 trial voyage of the NSR concluded that it is not currently viable as a commercial trade route. Ice Class vessels, designed specifically for cold climates, are currently required to make the journey, a route that is available for only three months of the year. Scientists at the London School of Economics created scenarios projecting what the route would look like in 2030, when it will likely become viable, thus showing that the impacts of increased NSR use will still likely occur. Furthermore, rising temperatures and melting ice are not the sole tests of the route’s viability. As the region is environmental sensitive, any developments in the Arctic circle are a very contentious issue. There would likely be limits on port and infrastructure developments. Black Carbon, a type of pollution produced by ships, would settle in the snow and help accelerate melting. This issue is so problematic that the International Maritime Organisation is already debating whether to ban the burning of heavy fuel in Arctic waters. Even after taking into account sensitive environmental consequences, other developments in the area may also take priority over and thus, slow down, the development of NSR. 13% of the world’s undiscovered oil resources and about 30% of its undiscovered natural gas resources are found in the Arctic circle, with Russia, America and Norway currently digging in the region.
Even if all the aforementioned variables affecting the viability of NSR align, the route itself still needs to be heavily developed. Ships need to become more suited to the harsh cold and stronger waters. There is currently a lack of emergency ports along the Arctic to support the route and make it safe for transit. With that being said, there is a general realisation that the NSR will have irreversible impacts on global trade routes. Egypt, Russia, Iceland and many other countries need to consider this inevitable future to either soften the blow or catalyse development.
Image thumbnail: geospatialworld.net